mardi 29 août 2017

Car rental market

In this post, I'll write about the car rental industry instead of writing about individual companies. In US, the car rental market is shared by three companies: Enterprise Holdings (private, about 60% of US market), Hertz and Avis (public, both about 20% of US market). In Europe, the market is a bit more fragmented with the five biggest companies having about 60% of the market, where Sixt (premium segment) and Europcar complement the three previously listed companies.

Characteristics of the industry:

  • All companies buy cars from several manufacturers to spread the risk and respond to consumer demand for renting as well as for reselling the cars;
  • A big part of the activity is to properly manage the fleet of vehicles. For instance, in Q2 2017, Hertz sold a lot of cars in a depressed second hand car market in order to re-adapt its fleet, triggering higher depreciation of the fleet and depressing earnings;
  • Some important operational measures are fleet utilization (usually around 75-80%), revenues per transaction day to be compared with depreciation per unit;
  • Companies buy some cars in the scope of a program where the constructor agrees to buy back the vehicles, whereas the other cars are at risk, which means that they will be sold at the spot market, with no guarantee of pricing. For instance, in 2016, Europcar had 92% of its car under a program, while Hertz had only 31%, bearing more risks;
  • Seasonality is important, spring and summers being the strongest months. The fleet adapts accordingly;
  • Most of the rental companies are highly leveraged and make a distinction between the fleet debt (backed by the cars) and the corporate debt. However, at the end, what counts is the total debt. For instance, both Avis and Hertz have about 15b$ of debt in Q2 2017, to be compared with about 9b$ of annual sales for both with losses for Hertz... The bonds of these two companies are classified as junk;
  • The companies try to anticipate the future regarding mobility, connectivity, car sharing, autonomous driving,... by having agreements with tech companies;
  • All companies (except Sixt) seem to be developing low cost offers in parallel of their traditional businesses.

Without getting into too much details, all rental companies seem to be heavily leveraged, with very low margins and uncertainties related to the development of the car industries. They all seem to target a margin of about 15% Adjusted EBITDA by about 2020, which does not mean much as we speak about "adjusted" accounting and EBITDA does not take into account depreciation, which can vary a lot depending of the second hand market, which does not look promising for the next serveral years, at least in US.

In order to follow these companies, I'll watch the evolution of the debt, utilization of the fleet, revenues per transaction day, the status of the secondary market.


For all companies, we have EV/Sales between 1,8 for Hertz and 2,8 for Sixt which seems to be too high for me, considering the risks mentioned above.

Sources for market shares: Annual reports 2016 Hertz, Avis, Europcar and Sixt

vendredi 28 juillet 2017

Redknee

Date of analysis: 28/07/2017
Price: CAD 1,10$ (USD 0,88$)
Nb of shares: 108519936 (but special situation here !)
Market cap: 119M

Redknee - a special situation


Redknee is a Canadian software company founded in 1999 (mainly involved in billing for Telecom companies) and was still managed by its founder Lucas Skoczvowski (till beginning of 2017) who wanted to grow its company via two acquisitions that did not produce the expected results (declining revenues, declining margins, losses,...) due to poor execution (Nokia Siemens Network in 2013 and Orga systems in 1995). The consequence is that the company breached covenants.

On 10th August 2016, ESX Capital announced that it has acquired 12 500 00 common shares (11,55% of the company) at a cost between CAD $1,5 and CAD $1,7. The interesting thing is that ESX Capital is a specialized company in turnaround in the software environment.

In December 2016, the company received an offer from ESX Capital, better than a previous offer from Constellation software:


  • 80M$ in preferred shares at a rate of 10%, redeemable after 10 years;
  • A 10 years warrant to get 60M$ of shares of the company (that will later translate into 46,2M$ additional shares). The strike is initially at 1,293$, but with the rights offering described below, the strike price is brought to 0,73 USD and 0,68 USD to avoid the dilution due to the rights offering and the additional rights to maintain the 39% of ESX Capital share in the capital.


Following this, ESX Capital announces a right offering to get 60M$ in order to finance the transformation. It will eventually be one right per share to acquire a share at 0,5$ and raise 54,2M$. There is also an anti dilution process for the warrant announced in December 2016 for which ESX can buy additional rights to maintain its 39% share of the capital, adding 46,2M shares at 0,5$, brining additional 23,1M$. Additionally, there are 2500000 warrants with a strike price at 0,5$ expiring in 10 years.

Basically, given the commitment of ESX and the low strike prices of the warrants, I consider that all the rights and warrants will be exercised and the number of shares will be:
108M (inital number of shares) + 46,2M (warrant December 2016) + 108M (right offering) + 2,5M + 46,2M (anti dilution rights) = 311M shares.

This is interesting as, to me, with this right offering, ESX is trying to get a bigger share of the company at a low price. 

Now let's see what would be the net debt.
At 31st March 2017:

  • Cash: 43M$
  • Pension: 20M$
  • Debt: 0M$
  • Preferred: 80M$

So, net debt is 57M$


Right offering will bring about 54M$ (that will be used within a year for the transformation) + 23,1M$, so let's say that after the right offering, net cash is 0 as this will probably be used for the R&D (see below), on top of the cash flow from operations. Therefore, EV = market cap.
Besides that, ESX announced that the revenues would be 120M$ for 2017 and that 100M$ of R&D would be needed over the next three years in order to catch up with the technologies used by the software. If the turnaround if successfull, EBITDA margin would be around 30-40% for an EBITDA at about 48M$. With an EV/EBITDA at 10, this would value the company at 480M$, i.e 1,54$ per fully diluted share in three years.
At 30% EBITDA margin with a multiple of EV/EBITDA at 8, we have an EV of 288M$ = 0,92$ per fully diluted shares.
However, with the preferred at 10%, it represents interests of 8M$ per year. So, it seems that with 10 year warrants at 0,68$, right offering at 0,5$ and preferred shares at 10%, this is a pretty sweet deal for ESX if they can manage to turnaround Redknee.
Owning shares at 1st August gives the possibility to participate to the right offering, but it seems that only Canadian residents can get the rights... In any case, I'd be for sure very interested if the price gets close to 0,6$.

At the time I'm writing these lines, the price is dropping 28% to 0,82$CAD without specific news (the final prospectus for the rights offering was published two days ago), i.e 0,66$USD, therefore I'm trying to buy a first bunch of share at these prices.




mercredi 28 juin 2017

Gaumont

Date de l'analyse:28/06/2017
Cours: 83,01 EUR
Nb d'actions: 4280871
Market cap: 355M
Net debt: 205M
EV: 508M

Documents de travail:
  • Rapport de l'expert indépendant sur l'OPRA 2016;
  • Rapport annuel 2016
  • https://www.devenir-rentier.fr/t14694


The story line


Gaumont a récemment décidé de vendre sa participation de 34% dans les Cinémas Gaumont Pathé pour 380M d'euros. Les conséquences de la vente de cette participation sont les suivantes:

  • Le business de Gaumont sera uniquement centré sur la production de films et séries, et la gestion du catalogue;
  • Avant cette vente, la dette nette de Gaumont est d'environ 205M et la société devrait donc passer en trésorerie nette;
  • Cette participation apportait des revenus récurrents et stables, contrairement à la production de films et séries dont les revenus dépendent du succès des productions forcément aléatoire. Ce risque est compensé par une forte réduction de la dette;
  • Gaumont a lancé une OPRA à hauteur de 75 EUR à laquelle l'actionnaire principal n'apportera pas.

OPRA

Avec la structure du capital présentée ci-dessous, nous pouvons constater que, étant donné que Ciné Par n'apportera pas, et que Bolloré et Dassault apporteront, il restera à savoir ce que feront les minoritaires publics (floating) et FEIM. J'imagine qu'avec un flottant très réduit après cette opération, l'objectif du management serait d'envisager un retrait de la cote et 75 EUR apparaît comme une valeur plancher.




Gaumont sans Cinémas Gaumont Pathé 

Sans la participation dans les Cinémas Gaumont Pathé, les résultats sont les suivants:


On peut voir que les investissements correspondent plus ou moins aux dépréciations et que ces deux éléments représentent un gros pourcentage du chiffre d'affaire. Certes, cela à contribuer à augmenter le chiffre d'affaires, mais l'EBIT reste très faible et diminue, malgré un investissement cumulé à plus de 600M sur les cinq dernières années.

Le catalogue

Concernant l’augmentation de la valeur du catalogue, j’ai aussi beaucoup de mal à y voir de la croissance. D’après le rapport de l’expert qui se base sur les informations du management, le résultat opérationnel du catalogue, avant structure de coûts (non connue), était de 21M en 2014, 19,3M en 2016 et est attendu avec un niveau légèrement inférieur de celui de 2015, qui était à 17,9M.

Donc, avec 190M d’investissements sur les 5 dernières années pour la production de films (je ne prends pas en compte les séries), le catalogue semble générer un résultat opérationnel en baisse (avant prise en compte de structure de coûts que nous ne connaissons pas).

J’ajouterais que Netflix représente 25,5% des revenus, ce qui est à double tranchant car même si cela peut représenter un potentiel de croissance, cela reste un client unique qui produit de plus en plus en interne et qui a énormément de fournisseurs (et donc de concurrents de Gaumont) à sa disposition. Il y a aussi le succès de Narcos qui va être difficile à répliquer.


Valorisation


Rachat de Bolloré et Dassault: 48M
380 - 48 - 205 = 127M de trésorerie nette

3639000 actions restantes = 273M de market cap à 75 EUR et donc une EV à 146M.

Gaumont possède également de l'immobilier pour environ 107M (principalement le siège principal et un ancien cinéma sur les Champs Elysées qui devrait être loué après travaux en 2019).

Pour moi, valoriser Gaumont au dessus de 75 EUR revient à parier sur la capacité de Gaumont à générer du cash avec ses productions, et cela passe à mon avis par un développement rentable de la production de séries aux US et en Europe, tout en ayant une production cinématographique aléatoire avec ses années creuses et ses succès.





mercredi 7 juin 2017

Manutan - Update S1 2016/2017

Suite au rapport semestriel S1 2016/2017, et à mon précédent article sur Manutan, voici les nouvelles données:

CA en hausse de 5,1% (7,1% en change constant).
Les marges sont en forte hausse avec une marge operationnelle courante à 6,8% et une marge nette à 5,2% positivement impactée par des événéments non récurrables dont le montant n'est pas précisé. Je retiendrai donc une marge nette de 5%. La hausse des marges et due à la hausse du CA et à la maitrise de la marge commerciale et des dépenses opérationnelles.

La dette nette est de 18M.
La book value est à 385M

Avec un prix de l'action à 81,32 EUR au 07/06/2017, nous avons:
Market cap: 619m
EV: 601M

En ajoutant 5% au CA de l'année 2015/2016, nous avons une estimation du CA 2016/2017 de 682 578 * 1.05 =  716 706 M

Avec une marge opérationnelle de 6,8% nous avons 48,7M. Arbitrairement, on peut appliquer un multiple de 12 (business stable, en légère croissance) et retirer la dette nette de -18M pour obtenir une valorisation de 584+18 = 602M

De même avec le résultat net, 716 706 * 5% = 35,8M. En appliquant un mulitple de 15 et en soutrayant la trésorerie nette, on obtient une valorisation d'environ 555M.

Le P/B est de 619/385 = 1,6

Manutan parait donc maintenant correctement valorisée et je pense vendre dans les prochains jours s'il n'y a pas de chute importe du cours.

dimanche 14 mai 2017

Vertu Motors

Date de l'analyse:14/05/2017
Cours: 48p
Nb d'actions: 397 269 839
Market cap: 190 689 522 GBP
Net debt: 9m GBP (-21M of net dept plus 30M due to business timing, see capital allocation section below)
EV: 200M GBP

Business

The group is the 5th car dealer in UK. The market is fragmented and being consolidated. Vertu Motors is also participating in this consolidation by purchasing under performing dealer and driving them back to normal profitability and eventually building a scaled franchised dealership. The company wants to grow cash flow by growing revenues, managing margins and working capital. Working capital is very important in this business as accounts payable and account receivable constitute an important part of the balance sheet.

So far, the business has been growing through equity offering. However, the management indicates that they now want to use existing cash flow and debt to fund future acquisitions and capex. The table below show the planned capital additions for the next few years (from the annual report 2017), without considering any acquisition or divestment.



As from 2019, capital additions would be less important and free cash flow should improve.

The growth can be illustrated with the following two graphs representing the growth in sales and the growth in earnings per share.




Big uncertainties exist with the Brexit. Also, sales of vehicles in UK reached a historical high at 2,69M units in 2016, and this is expected to decline in 2017 (http://www.bbc.com/news/business-38516247).



However, Vertu Motors' business is divided into four parts that are better explained from the following extract from the annual report 2017 :  


We can see that after sales and used cars represent an important part of the gross results, which seems to be a good counter cyclical effect to the potential downturn of new cars sales. This would not fully prevent a downturn due to a recession.

Capital allocation

The group has virtually no debt as the annual report indicates a net cash position of 21m GBP, although the managements indicates that 30m GBP should be deducted to that due to the timing of the closing of the balance sheet. With no debt, the group is in a better position compared to competitors in case of a recession. 

Vertu motors pays a dividend with a policy of having net income representing about 4 times the dividend, which seems to be reasonable when growing with a return of investment higher than the cost of capital. I would even prefer no dividend at all in this situation.

The pension scheme is slightly over funded.

Valuation

Return on equity for 2017 is 10,8%. 

The free cash flow to equity (before acquisitions) over the last ten years stand at 12,1%.

EBIT 2017 is 30m (2016 was 26m).
Dluted earnings per share 2017 is 6,04p (2016 was 5,92p)
Book value of equity 2017 is 246m (2016 was 198m) with 33m$ coming from the issuance of new shares.

With the data from the annual report 2017, we have:
EV/EBIT = 200/30 = 6,67 ( equivalent to 15% return)
PER = 48/6,04 = 8 with no debt


Conclusion

The valuation seems to be very attractive for a growing company (although in a growing market during in a cyclical industry) but the sales of new care seems to have reached a peak and it is facing the Brexit. A lot of uncertainties are already priced in, but I would prefer to wait for a drop in the share price, knowing that the fundamentals of the company are very good (no net debt).

samedi 6 mai 2017

Wayfair


Following the analysis of Overstock, I got interested by Wayfair as Overstock's CEO keeps talking about Wayfair, expecially during the Q4 2016 conference call, highlighting their pretended non sustainable growth. This made me curious to compare both competitors and to follow Wayfair's evolution.

Date of analysis: 06/05/2017
Share price: 48,85$
Number of shares: 50 338 973 of  class A (1 vote per share) and 35 617 581 of class B (10 votes per share)
Market cap: 4 113 m$
Net debt: -348m$ (but this cash would be required for accounts payable, see below)
EV: 3765m$


Interesting discussions are:
https://seekingalpha.com/article/4051586-wayfair-see-80-percent-downside
http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/w-wayfair/


Operations/Business


Wayfair is an online retailer for home products with currently 8 millions products offered by 10 000 suppliers. 2016 revenues are 3,8b$ and 90% of revenues are in US, but they are trying to expand in Canada, UK and Germany.

Wayfair wants to address this market for home that it estimates to be a 600b$ market in US/Canada/Europe, for which 9% of the sales are made online. 

Wayfair is currently growing to capture market share to ultimately gain scale economy and be profitable with a 8-10% EBITDA margin (excluding equity based compensation), according to the Q4 2016 presentation. Currently, Wayfair is losing money to fund its growth via marketing spends, capex investments for its logistics operations and customer support. 
Wayfair has been losing money every single year, with a net loss of 194m$, 77m$ and 150m$ in 2016, 2015 and 2014.

The big question is to know if Wayfair can be profitable once it reaches a satisfying scale and can be profitable. If Wayfair cuts its advertising expenses, it will probably reduce the sales.

Moreover, comparing some metrics to Overstock, we can see that the efficiency of operations does not seem to be optimal as Overstock generates much more revenues per employees, spend less to acquire customers and get a higher contribution margin and repeated orders from these customers. However, the more Wayfair scales, the more it should have repeat customers and the less it should spend in advertising as a % of sales. Also, Wayfair has higher gross margin that is explained by Overstock's CEO by higher prices on average from Wayfair according to third parties surveys (as the statement is coming from Overstock, it must be treated as potentially biaised).

The table below shows some elements of comparison with Overstock for 2016:


Google Trends is also interesting to check as we can see that Wayfair is growing on volume searchs while overstock tends to decline over the last five years.



Wayfair is also showing Customer Acquisition Cost in the slide below from the Q4 2016 presentation. 



I see many issues with it. First, the total advertising spend does not include 177m$ of marketing and sales, but let's say that this is the amount needed for the existing customers to keep ordering. So, 398,1m$ is only or new customers acquisition and therefore 66$ is spend to acquire a new customer.

Then, the contribution margin is calculated by the gross margin less Customer Service and Merchant fees. But this calculation completely forgets about the advertising and marketing costs ! Adding these costs would put the contribution margin to a bit less than 3%. At 3%, annual contribution per customer is 395*3%=12$. Moreover, so far, only 58% are repeated customers.

Another aspect to consider is that working capital is negative. It is great as long as they grow, but now, the account payable is greater than the cash, and current ration is less than one. Wayfair could so far pay the suppliers later and later (42 Days Payable Outsanding), but this is not an indefinite proposition and at some points it has to stop, or some cash will be needed to cover the short term expanses, although Wayfair claims that they want to self fund their growth. It will be interesting to follow the working capital in the next quarters as I believe this is not sustainable.


Valuation


Please see the following article for my valuation of Overstock.

As Wayfair is consistently reporting losses, and even sometimes negative cash flow from operations, a way to look at it is to compare Price/sales of both companies. I don't consider EV as cash is probably needed to cover the account payables.
Overstock Price/Sales: 0,22
Wayfair Price/Sales: 1,2


Another way to look at it is to consider the long term goal of 8% EBITDA margin for Wayfair, consider that when it is stable, it would demand a multiple of 8 times EBITDA (arbitrary value I give for a stable profitable retailer). Therefore, the targer EBITDA should be 4113/8 = 514m. With a margin of 8%, revenues should be 514/0.08 = 6,5b$, considering that this margin will be reached. We should also discount this to take into account the time value of money. So, in order to sustain this valuation, the company should at least double its sells and reach an EBITDA margin of 8%, without raising any debto or capital, and within a reasonable time frame (let's say less than 5 years), which seem to be optimistic assumptions. 

According to Dataroma, the management and the co-founders have been selling a lot of shares over the last 12 months.

Conclusion


The valuation of Wayfair seems to be generous, considering it is facing strong online competition (Amazon, Overstock) and it seems that the the growth is not profitable, which could lead to some serious issues. However, I am not ready to short the stock as the timing of the events is really hard to predict. But for sure, I'll follow this interesting situation, still considering being a shareholder of Overstock.






lundi 27 mars 2017

CBL & Associates Properties

Date de l'analyse:27/03/2017
Cours: 9,45 $
Nb d'actions: 170 792 645
Preferred stocks D (7,375%): 1 815 000 shares at liquidation preference of 250 $ (can be redeemed any time), market value: 238,9 $
Preferred stocks E (6,625%): 690 000 shares at liquidation preference of 250 $ (as from 12 October 2017, may be redeemed), market value: 231 $
Market cap: 1 613 990 495 $
Net debt: 4 950 000 000 $ (includes non consolidated debt)
Net debt + preferred = 4 950 000 000 + 626 250 000 = 5 576 250 000$
EV: 1 613 990 495 + 626 250 000 (total preferred+ 4 900 000 000 = 7 140 240 495$
Sources for analysis: 10K 2016, presentation March 2017 and Q4 2016 conf call. For the rest of the analysis, I will consider the preferred stocks as debt.

Business


CBL &Associates properties is a REIT of class B malls in US. Class B malls usually refers to malls with sales below $500/sqf. The company divides its properties into Tiers:
Tier 1: sales > 375$/sqf
Tier 2: sales > 300$/sqf and < 375$/sqf
Tier 3: sales < 300$/sqf (Tier 3 now represents 6,1% of NOI).

For the total portfolio, average Sales per sqf is 376$ with a diversified range of tenants.

Dividend yield is 11,22% with an FFO payout ratio of 48% !



Operational metrics


Occupancy rate is 94%.
NOI is 775m$ (NOI margin: 72%).
Adjusted FFO to the common unitholder is 410m$ (preferred dividends are deducted).
G/A represents 6,1% of the revenues and 8,1% of the NOI.

As the company does not provide a calculation of EBITDA, here is mine:
EBIT: 381m
D/A: 292m
Loss on impairment: 116m
One time gain in sale in equity in earnings in unconsolidated affiliate: 97m
EBITDA: 381+292+116-97 = 692m


Capital structure and credit metrics


81% of the 5b$ debt is at fixed rate.According to the presentation of March 2017, net debt to EBITDA is 6,5, but taking into account the prefered shares and calculating my EBITDA, I get net debt/EBITDA  at 8,06.
Interest coverage: 3,2.
Total debt / undepreciated book value of assets: 53%.
The debt is still high but the priority for the management is to reduce the debt (also reducing the number of unencumbered properties) and redevelop properties to maintain/raise the NOI. I give credit for the management as they have been doing this over the last few years and they own approximately 10% of the shares, therefore, interests are aligned. 

Net Debt/EBITDA = 5 576 / 692 = 8,06

Valuation


Book Value Method

Gross book value is 10b$, debt and preferred is 5,5b$, therefore, the value of the equity should be 4,5b$, to be compared with a market value of 1,6b$. However the central question is the value of the properties now, considering the risks on the retails and shopping malls compared to the value of the assets when acquired.

NOI and cap Rate method

NOI is 770m. Applying a 10% discount rate gives 7,7b$. When subtracting debt and preferred, we have a valuation of 2,2b$.

We can try to give a more granular valuation based of the three Tiers proposed by CBL, but I could not find the share of Tier 1 and Tier 2 for the NOI. I only have 6,1% for the Tier 3 NOI. By applying a discount rate of 8% for Tier 1&2 and a discount rate of 12% for Tier 3, we have a valuation of:
Tier 1&2: 770m* (100%-6,1%) / 8% = 9b$
Tier 3: 770m*6,1%/9%= 521m$

When subtracting debt and preferred, we have a valuation of 9 + 0.52 - 5.5 = 4b$.
Obviously, by changing the cap rate by just 1%, we have big variations in the valuation and the cap rate is always an estimation. In this case, I've tried to consider a fair cap rate.

Relative valuation

FFO per share guidance for 2017: 2,26 - 2,33
Market value is 4,1x estimated 2017 FFO, which is very cheap. 
EV/EBITDA = 7140/692= 10,3

The question, as stated before is to guess the evolution of the retail industry and therefore, the evolution of the NOI. If the NOI is stable, the offered price is very cheap and could be easily multiplied by 2.

Conclusion

By all metrics, the company seems to be cheap. CBL & Associates Properties is a well managed REIT, but in a difficult market and with assets (class B malls) that could be in difficulty considering the current retail reputation in US with the development of online retail and the foreseen raising interest rates. 

Part of the anchors are Sears, JC Penney, Macy's and there is the fear that losing an anchor may impact a whole mall as smaller tenants will leave a less attractive mall. 

However, the management seems to be more optimistic and (pro)actively overcoming these difficulties while improving the balance sheet. At these price, I'd seriously consider buying some shares. 

During the conf call Q4 2017, the management informed that Q1 would have difficult comparable. I will be closely following.